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Infosys Case Study on Corporate Governance

About Infosys

Infosys Limited was started by a team of seven software engineers. It began its journey in 1981 with an initial investment of US $250 as a software development organization. It opened the first international office in the USA in 1987. The major revenue of the company came from a dedicated offshore development centre. Infosys came out with an initial public offering in 1993 and became the first Indian IT company to get listed on the NASDAQ in 1999.

Corporate Governance and Infosys

The primary purpose of corporate leadership is to create wealth legally and ethically. This translates to bringing a high level of satisfaction to five constituencies – customers, employees, investors, vendors and the society-at-large. The raison d’être of every corporate body is to ensure predictability, sustainability and profitability of revenues year after year.

 – N. R. Narayana Murthy

Infosys was one of the first companies in India to publish a compliance report on corporate governance, based on the recommendations of a committee constituted by the Confederation of Indian Industries (CII). Infosys maintained a high degree of transparency while disclosing information to stakeholders.

The corporate governance philosophy at Infosys is based on the following principles:

• Satisfying the spirit of the law and not just the letter of the law
• Going beyond the law in upholding corporate governance standards
• Maintaining transparency and a high degree of disclosure levels
• Communicating externally in a truthful manner about how the company is run internally
• Complying with the laws in all the countries in which the company operates
• Having a simple and transparent corporate structure driven solely by business needs
• Embracing a trusteeship model in which the management is the trustee of the shareholders’ capital and not the owner
• Driving the business on the basis of the belief, ‘when in doubt, disclose’

History of Corporate Governance in Infosys

In the late 1990s, the Confederation of Indian Industries (CII) published a code of corporate governance. In 1999, the Securities and Exchange Board of India (SEBI) appointed a committee under the Chairmanship of Kumar Mangalam Birla to recommend a code of corporate governance. The report was submitted by the committee in November 1999 and accepted by SEBI in December 1999.

Infosys had accepted the recommendation of both the CII and the Kumar Mangalam Birla Committee and as on date Infosys is also in compliance with the recommendations of the Narayana Murthy Committee on Corporate Governance, constituted by the Securities and Exchange Board of India (SEBI).

Infosys has also been audited for corporate governance by the Investment Information and Credit Rating Agency (ICRA) and has been awarded a rating of Corporate Governance Rating 1 (CGR 1) in 2013 and, later on, Infosys has the highest rating in Environmental, Social, and Governance (ESG) rated by CRISIL’s ESGauge in 2021. Infosys’ FICO (credit score) is A- (as rated by Standard and Poor’s).

Analysis of Corporate Governance in Infosys

Our corporate governance is a statement of the values we stand by as we conduct our business and engage with our stakeholders. Our Company has been a leader in adopting internationally recognized corporate governance guidelines and has set the highest standards in abiding by them.

-Kiran Mazumdar-Shaw

Lead Independent Director, Infosys

Board composition

At the core of Infosys corporate governance practice is the Infosys Board, which oversees how the management serves and protects the long-term interests of all our stakeholders. The majority of the board, seven out of 10, are independent members. As active and well-informed members of the board, they are fully committed to ensuring the highest standards of corporate governance. In addition, the independent directors make up the audit, compensation, investor grievance, nominations, and risk management committees, bringing their valuable perspective to the board.

As a part of our commitment to follow global best practices, Infosys comply with the Euro shareholders Corporate Governance Guidelines 2000, and the recommendations of the Conference Board Commission on Public Trusts and Private Enterprises in the US. Infosys also adhere to the UN Global Compact Program.

Board Independence and Lead Independent Director

The Board of Infosys is composed of a majority of directors who meet the criteria for independence established by the Indian Companies Act, Listing Regulations and the listing standards of the New York Stock Exchange (NYSE).

The Infosys Board also has a Lead Independent Director who serves as a liaison between the non-executive directors of Infosys and management and performs such additional duties as the Board may determine.

Being ethical and managing the business with accountability

Corporate governance is about maximizing shareholder value legally, ethically and on a sustainable basis. At Infosys, the goal of corporate governance is to ensure fairness for every stakeholder – Infosys customers, investors, vendor-partners, the community, and the governments of the countries in which it operate. Infosys Board believes that sound corporate governance is critical in enhancing and retaining investor trust and it is a reflection of Infosys culture, policies, relationship with stakeholders and its commitment to values. Infosys also endeavor to enhance long-term shareholder value and respect minority rights in all our business decisions.

Corporate Social Responsibility

Infosys has been an early adopter of corporate social responsibility (“CSR”) initiatives. Along with sustained economic performance, environmental and social stewardship is also a key factor for holistic business growth. The Company established the Infosys Foundation in 1996 as a not-for-profit nodal body aimed at providing a dedicated approach to community development and also to fulfil our CSR commitments.

Infosys Foundation works towards removing malnutrition, improving healthcare infrastructure, supporting primary education, rehabilitating destitute individuals and caring for animals, and preserving Indian art and culture. Infosys Foundation partners with non-government organizations (NGOs) to make a difference among local communities. The Company’s focus has always been to contribute to the sustainable development of society and the environment, and to make our planet more livable for future generations.

Business Ethics

The Business ethics and values in Infosys are embodied in C-LIFE (Client Value, Leadership by example, Integrity and Transparency, Fairness and Excellence) and Infosys is also in Compliance with the G20/ OECD Principles of Corporate Governance.

The Business ethics is the foundation on which Infosys is built and in good stead from the inception. Infosys was recognized as one of the 2022 World’s Most Ethical Companies for the Second Consecutive Year by Ethisphere.

Environmental, Social, and Governance (ESG)

Infosys has balanced success as a business with unwavering focus on exemplary governance and responsiveness to the needs of the ecology and society. As an early proponent of responsible business, Infosys has readily embraced its obligation to integrate ESG factors into what it do, which is only increasing in importance, particularly in the wake of COVID-19.

For instance, in early 2008, Infosys began to take action to combat climate change and have now announced Infosys’ carbon neutrality achievement for 2020. Today, Infosys’s 2030 vision reflects how ESG will continue to be integral to Infosys’ sustainable business performance. Infosys has the highest rating in Environmental, Social, and Governance (ESG) rated by CRISIL’s ESGauge in 2021.

Consideration towards Stakeholders & Transparency

The Board of Infosys always considers the impact of various actions and decisions on the company’s customers, employees, suppliers, government/administration, statutory authorities and discloses all direct or indirect material matters affecting the stakeholders. This in turn brings transparency for various Stakeholders of Infosys.

Board Committees and its independence

The Board of Infosys has Audit Committee, Nomination and Remuneration Committee, Stakeholders’ Relationship Committee, Risk Management Committee, Corporate Social Responsibility Committee and Environment, Social, Governance (ESG) Committee

The Composition of the committees is as the respective terms of reference drawn in compliance with the Indian Companies Act, Listing Regulations, listing conditions of NYSE and such other laws / regulations for the time being in force.

Risk Management

The Infosys Board is responsible for overseeing management’s efforts to assess and manage material risks and for reviewing options for risk mitigation. The Board also reserves oversight of the major risks of the Company and may delegate risk oversight responsibility to committees of the Board. Risk Management Committee of Infosys assists the Board in fulfilling its corporate governance oversight responsibilities with regard to the identification, evaluation and mitigation of strategic, operational, external environment risks and also approving the enterprise risk management framework and associated practices of the Company.

Corporate governance issues at Infosys

The following were some of the corporate governance issues that raised questions about the governance of Infosys.

Phaneesh murthy case

Infosys became entangled in a scandal, that dented its reputation as a company that had the best corporate governance structure in the country. The events took place during October 1999 and December 2000 became public knowledge in India only when Phaneesh Murthy, the head of the sales and marketing, and communication and product services division of Infosys (and a director on the board), resigned from his post in June 2002. Phaneesh said that he had resigned in order to focus on fighting a lawsuit filed against him in the US. The lawsuit, filed by his former secretary, Reka Maximovitch alleged that Phaneesh had sexually harassed her and unlawfully terminated her employment. The company’s share price declined by 6.6% soon after Phaneesh left.

Infosys thereafter on November 24, 2004 issued a press release wherein Naryana Murthy said “Infosys has learnt that the sexual harassment lawsuit filed by Ms. Jennifer Griffith, a former employee, against the Company and Mr. Phaneesh Murthy, a former director, has been settled by Mr. Phaneesh Murthy and Ms. Griffith, shortly before the October 29, 2004 trial date set for the lawsuit’s trial. Infosys has now learnt that the settlement agreement was recently signed by the parties to the settlement agreement – Mr. Phaneesh Murthy and Ms. Griffith.

Mr. Narayana Murthy added “I am glad that we stood by our objective of not contributing to the settlement of this sexual harassment case involving Phaneesh Murthy.”

The appointment of Vishal Sikka as CEO of Infosys, including his compensation and severance paid to other Company Executives

Mr. Narayan Murthy’s who is one of the Founder of the Company, questioned the appointment of an independent Vishal Sikka, a former member of the executive board at German software firm SAP, took the top job at Infosys in 2014, becoming its first non-founder CEO and severance payouts given to others, including former finance head Rajiv Bansal.

The Infosys Board has backed Sikka, and has brushed aside concerns over CEO compensation, appointment of independent directors and severance pay relating to former employees, saying those were old issues and that full disclosures had been made.

The payment amount of Bansal’s pay was amounted to 24 month of salary. Even security and Exchange board of India consider that the amount is excessive. Infosy’s audit committee commissioned Cyril Amarchand Mangaldas to investigate certain allegations about the payment. The law firm found that the severance pay was “not with the intention of silencing him from disclosing any impropriety”

Conclusion:

The corporate governance standards established by the Board of Directors of Infosys Limited provide a structure within which directors and management can effectively pursue the company’s objectives for the benefit of its stakeholders, and these guidelines are also framed in conjunction with the company’s Memorandum & Articles of Association, the charters of the committees of the Board, and applicable laws, regulations, and guidelines in force for the time being in India and the USA and other jurisdictions, as applicable.

Infosys’ leading position is captioned as an Asian invasion in the rankings(Forbes India Magazine, 2020) and graded 3rd in the world among the best companies in 2019 based on its solidity, honesty, etiquette, justness to its employees, and the accomplishment of its products and services, which instantiates the company’s culinary masterpiece, the veneration it enkindles amongst its stakeholders, and also illuminates the commitment of universal technological services(Forbes American Business Magazine,2020). While it had a few corporate governance issues, they looked into those issues and resolved them so as to ensure its title as India’s best governance company.

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This piece has been authored by Ms. Saru Sharma, a first year student of B.A.LL.B(Hons.) at the Rajiv Gandhi National University of Law, Punjab.

Introduction

India, in the recent years, has witnessed manifold instances of weak governance, fraud and chronic capitalism. This has not only led to the demise of many large-listed companies but has also led to the emergence of a growing concern around corporate governance in various corporations, agencies and firms in the country. A Punjab and Maharashtra Co-operative Limited bank that went down earlier this year, is proof that regulated companies can both suffer and be a trigger for fraud. To say the least, as trends go, matters that are categorized under the general umbrella of “corporate governance" are only set to take up greater mind space among CEOs and boards in the coming years. These include issues about the wholesomeness of board and committee composition, disclosure standards, succession planning, executive compensation, stakeholder engagement, board effectiveness and evaluation, risk management and strategy for environmental, social and corporate governance (ESG). [i]

Corporate Governance: What Is It?

At this crucial juncture, the need for discussion and awareness creation about corporate governance seems more important than ever before. The term corporate governance refers to the act of managing an entity. [ii] Corporate Governance (CG) may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. [iii] According to the Securities and Exchange Board of India (SEBI), “the objective of Good Corporate Governance is to increase the long term value of the company for its shareholders and all other interested partners”. [iv] The norms for the same are set out in the Companies Act, Clause 49, the listing agreement that companies sign with the stock exchanges and in SEBI’s new Listing Obligations and Disclosure Requirement Regulations of 2015. [v]

Contemporary Challenges to Corporate Governance : An Apt Example - The Leadership Crisis in Infosys

The corporate battle of big business houses in India have triggered the need for transparency in safeguarding the interest of employees, stakeholders and minority shareholders. Infosys, which has been suffering with a leadership crisis for almost a decade now, seems to be just the apt case in point of this. Co-founded and established in 1981 by Narayan Murthy, Nandan Nilekani, N. S. Raghavan, S. Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora, Infosys was once seen as a company that prided itself for its high standards for CG. It was even adjudged as the best company for corporate governance in 2010 by Asiamoney. But the bellwether company which was once a story of entrepreneurial agility and integrity as India moved from license-control Raj to liberalization. [vi]

The recent allegations by a whistleblower who claims to be an employee of the company’s Finance Department has alleged the top officials of indulging in unethical practices and the CEO of the company, Salil Parikh for certain misdeeds. They also alleged the involvement of CFO, Nilanjan Roy in ‘unethical practices’ for boosting short-term profits. The complaint was addressed to the Chairman, independent directors and the shareholders. This is not the first such a complaint has surfaced in the public domain. Not long ago, in 2017, CEO Vishal Sikka was accused of similar practices due to which he had to resign. This incident raises two main concerns. First, that corporations and people in power, in the name of profit might exceed their given powers and exploit those who don’t have a voice. And second, that this implies a lack of governance in Indian firms and companies today.

What must be done ?

The plethora of cases that we have been witnessing for quite some time now, especially the ones where stocks were hammered in a short period of time, all indicate an alarming state of affairs. Both, the large global conglomerates like Infosys, YES Bank and ICICI (which faced serious allegations regarding unethical practices used by the companies against stakeholders’ interest) And the small companies like PC Jewellers and Infibeam (who were accused of making opaque deals and group transactions with limited disclosure) have been hit by it. [vii] This menace of weak corporate structure is consuming everyone under it. As a measure, SEBI had constituted a committee on corporate governance under the chairmanship of Uday Kotak in June 2017. [viii] The committee was expected to submit its report within four months. Market participants said that the Infosys issue too should be considered in detail by the committee. [ix] Almost 40 out of 80 recommendations made by this committee were recently accepted, these recommendations broadly deal with separation of roles of chairman and MD & CEO, mandatory disclosures, augmenting board strength and diversity regulating number of directorships.

Some other critical issues that must be brought under the light at this point, include questions like: Is the board performing in the larger interests of the shareholders? Does the company have adequate risk management systems in place? For example, in case of Infosys, not a single red flag was raised by any board member. [x] In order to ensure good corporate governance, Firstly , it must be made sure that people at significant positions in companies don’t stay for too long or get too comfortable in them so as to avoid situations where any of them indulges in unethical practices. A lesson could be learnt from the western countries like Italy, United Kingdom and Finland etc. whose stringent laws ensure the same, in fact the world average for tenure of CEOs is 4 years [xi] . Secondly , while whistleblowing is an important tool for monitoring corporate social responsibility, it is imperative for the company to build trust among its employees. Not all whistleblowing acts are genuine, a study conducted recently states that more than 60% of them are frivolous. SEBI recently announced a reward for up to 1 cr for corporate whistleblowing. [xii] Though a good step, but it must not be considered enough. The need of giving confidence regarding the protection of identity of the whistleblower is equally vital.

Currently, even though the country has many regulations in place, they are still not properly implemented, the fact that Infosys whistleblower complaint was reported to the public 21 days after it was made is a clear proof of that. Another example of it could be the need of better implementation of provisions for minority shareholder rights. Thirdly , carrying out of independent investigations by the concerned agencies is another salient concern. It would help, keeping at arm’s length, crisis like that of Infrastructure Leasing & Financial Services (IF&LS) created due to substandard audit reports.

The Infosys fiasco has essential lessons in corporate governance for all of us. There was a time when the same company was known for its high standards in good governance, setting an example for the rest of the world. However, when promoters mix-up their roles as executives, shareholders and board of directors, then such problems are bound to rise. The concern of shareholders over the huge severance pay to ex-CFO Rajeev Bansal, huge pay hikes to then CEO Dr. Vishal Sikka, along with Panaya deal and appointment of Punita Kumar Sinha as a director or the latest allegations of financial mismanagement by the company CEO and CFO are all examples of it. [xiii] . A company which has good corporate governance has a much higher level of confidence amongst the shareholders associated with that company. In case of Infosys, it has witnessed a steep fall in its share prices of and favor of the shareholders and stakeholders in it. It must act as a reminder of how whistleblower allegations, which may or may not be true, can harm a company’s reputation. Hence, for the company itself to to win the trust of its founders and other stakeholders, it must first stabilize the standards of its Corporate Governance practices.

All of this makes one thing very clear, and that is that transparency and accountability is the key to corporate governance. While instilling a culture of cut throat competition and large targets, the company culture of ethical and just governance must not be compensated. Because you may have no choice in politics. But with companies, you don’t have to wait for five years to speak up on bad governance. [xiv]

[i] Amita Gupta Katragadda, U.K. Sinha, Opinion | The Quiet Transformation of Corporate Governance, Livemint, May 10, 2019, https://www.livemint.com/opinion/columns/the-quiet-transformation-of-corporate-governance-1557392837251.html

[ii] Aarati Krishnan, All you wanted to know about Corporate Governance, The Hindu, August 21, 2017 https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-corporate-governance/article9825427.ece.

[iii] Corporate Governance: concepts and objectives, Bussiness.gov.in,( Last accessed: January 8, 2020) https://archive.india.gov.in/business/corporate_governance/concept_objectivess.php

[iv] Dr. Alka Mittal , An analysis of corporate Governance Imbroglio at Infosys , International Journal of Management Studies, http://www.researchersworld.com/ijms/

[vi] Jagdish Rattwani, A corporate crisis in Infosys again , Deccan Herald, November 12, 2019.

[vii] Corporate Governance in India: What needs to change ?, India Infoline News Service, Mumbai, November 30, 2018.

[viii] Report of the Uday Kotak committee on Corporate governance, SEBI, 5th october 2017.

[ix] Oommen A. Ninan, Corporate Governance: Focus on Sebi, The Hindu. August 20, 2017 https://www.thehindu.com/business/Industry/corporate-governance-focus-on-sebi/article19530038.ece

[x] Corporate Governance in India: What needs to change ?, India Infoline News Service, Mumbai, November 30, 2018.

[xi] Sachin P. Mampatta, How Long Does an Indian CEO last in a corner office?, Livemint, September 27, 2019, https://www.livemint.com/Companies/Kek9zqK4tT4MVhtFYK957I/How-long-does-an-Indian-CEO-stay-in-the-corner-office.html

[xii] ETmarkets.com, Sebi okays up to 1 cr reward for corporate whistle blowers, Economic Times Markets, August 21, 2019, https://economictimes.indiatimes.com/markets/stocks/news/sebi-okays-up-to-rs-1-cr-reward-for-corporate-whistle-blowers/articleshow/70771483.cms?from=mdr

[xiii] Dr. Alka Mittal , An analysis of corporate Governance Imbroglio at Infosys , International Journal of Management Studies, http://www.researchersworld.com/ijms/ .

[xiv] Aarati Krishnan, All you wanted to know about Corporate Governance, The Hindu, August 21, 2017 https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-corporate-governance/article9825427.ece .

• Corporate Governance